RBI Hikes Repo Rate, Cash Reserve Ratio By Half A Point Each

GOVT, MINT STREET GO ALL-OUT

IT'S WAR ON INFLATION

INDIVIDUAL borrowers, corporates, stock market investors and cash-starved property developers will have to walk a long, painful road, with their worst fears coming true. In a double blow, the Reserve Bank of India has hiked the benchmark repo rate and cash
reserve ratio (CRR) by 50 basis points each. Repo rate is the rate at which banks borrow from RBI, while CRR is the slice of customer deposits that banks set aside as cash with the central bank. The monetary actions, announced late on Tuesday evening, reflect a desperate political leadership and a decisive central bank taking inflation head on.
    Home loan leader HDFC is expected to hike its interest rates and all banks, government-owned as well as private, will revise their prime lending rates. Thanks to hardening bond yields — a reflection of interest rates in the money market — even sub-PLR loans will go up. "We will take a call on interest rate at the end of the week or Monday. Any new rate will be effective July 1. Those developers who have been merely accumulating land will face the crunch. However, I don't expect home loan demand to suffer," said HDFC MD Keki Mistry.For a home loan borrower, a 50 basis point hike in repo rate means an increase of Rs 35 in the EMI for every Rs 1-lakh loan. Large PSU banks like PNB are also planning to hike rates.
Not just home loans, two-wheeler, auto, as well as working capital for companies, will turn more expensive by 50 to 100 basis points. Banking scrips will be hit hard by the move, followed by realty and auto.
    The key question is to what extent higher rates will affect investment demand, and pull down GDP growth. SENSEX ON EDGE
The hike in repo
rate and CRR by RBI after the market hours on Tuesday could give the marauding bears another excuse to go on the rampage on Wednesday, after Tuesday's big fall. Fund-raising to get tougher
    ACCORDING to Ambuja Cements MD AL Kapur: "Corporate margins and expansion plans will be adversely affected. Even raising money will be a huge task. This measure, which is aimed at controlling headline inflation, will put the economy in a Catch-22 situation."
    While the move was expected and only die-hard optimists in the financial market will be caught on the wrong foot, a twin hike will only deepen the gloom in the stock market. "...In the wake of a terrible week, it's not the best of news. Growth will suffer and markets are likely to remain under pressure, " said BSE broker Ramesh Damani.
    The half-a-point CRR hike will see close to Rs 16,000 crore being withdrawn from the market. This comes at a time when the central bank is draining close to Rs 1,000 crore every day by selling dollars to support the rupee. The cost of overnight money has gone up to 8.5%, and on Tuesday banks borrowed Rs 38,000 crore from RBI. From Wednesday, their borrowing costs will go up by half-a-percentage point.
    Bharat Banka, president and head of finance at the Aditya Birla group, however, feels that corporate growth will not be affected in the short term. "No sector other than real estate and construction has so far faced any problem in raising funds at a reasonable rate," he said.
    According to Hemant Mishr of Stanchart: "The markets were positioned for monetary action after the higher than expected inflation numbers over the past few weeks. Given the government and the RBI's resolve to contain inflation, we expect more action and a policy mix of monetary, exchange rate and fiscal steps to contain inflation."
    With overnight rates quoting at 8.5%, the yield on the 10-year bond is expected to shoot up closer to 9% in the short term. Spreads on corporate bonds are expected to widen to over 75 basis points, close to the 10% level. "If inflation continues at the present level, I expect that the yield on the 10-year bond would be in the 9% to 9.5% range," said Ashish Vaidya of HDFC Bank.
    Dealers said the increase in rates would also push up the cost of overseas borrowing for corporates, since hedging foreign currency will also be more expensive.